ETHICS PROBLEM During the 1990s, General Electric put together a long string of consecutive quarters in which the firm managed to meet or beat the earnings forecasts of Wall Street stock analysts. Some skeptics wondered if GE “managed” earnings to meet Wall Street’s expectations, meaning that GE used accounting gimmicks to conceal the true volatility in its business. How do you think GE’s long run of meeting or beating earnings forecasts affected its cost of capital? If investors learn that GE’s performance was achieved largely through accounting gimmicks, how do you think they would respond?
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